M&A monitor

A challenging environment, but opportunities remain

Welcome to our Q2 M&A monitor.

As we move into the second half of 2022, the volume and value of announced deals is unsurprisingly lower than the bumper numbers seen by the midpoint of 2021. Antitrust authorities continue to subject transactions to tough scrutiny, with a growing range of factors such as geopolitical concerns, sustainability and access to essential products playing an increasingly important role in regulators’ decision-making processes. Meanwhile, the number of foreign direct investment regimes continues to grow as protectionism appears to be on the rise in a post-Covid world. At least in the UK, though, our team’s analysis of the data from the first three months of the new national security and investment regime shows that acceptance and clearance timelines in no-issues cases are reassuringly quick.

A notable factor contributing to deal failure rates is the challenges would-be buyers face in raising finance. Listed buyers without sufficient cash on their balance sheet face the prospect of either raising equity capital finance in the context of public company valuations which are approximately 20% lower than at the start of the year or tapping illiquid debt capital markets that have been shaken by rising inflation, increases in central bank interest rates, geopolitical uncertainties and global supply chain disruptions. Walgreens’ recent announcement that it has terminated the proposed sale of Boots, citing 'market instability severely impacting financing availability', is a prime example.

For cash-rich investors, however, lower valuations will continue to provide the incentive to grab a bargain. Global exchange rates will also impact on where and when an increase in M&A activity is seen. For example, in Japan, Nomura’s chief executive recently stated he expected a weakening yen to fuel a surge in inbound M&A. General conditions for inbound M&A have appeared favourable in Japan for some time, driven by the need for Japanese conglomerates to streamline portfolios and succession issues in sizeable family-owned businesses. Nevertheless, we still anticipate a number of barriers that will dampen inbound M&A in Japan, including reticence to sell, preference for Japanese buyers and travel restrictions.

From a sectoral perspective, one area in which we are predicting an increase in deal activity in the second half of the year is in life sciences, particularly biopharma. Our specialist team has provided a timely overview of key considerations to bear in mind when structuring milestone payments (also known as 'contingent value rights') and diligence clauses in life sciences M&A transactions.

Buyers in the life sciences sector shouldn’t expect an easy ride though, and should anticipate heightened scrutiny from US and foreign antitrust agencies, more in-depth, lengthier reviews, and needing to contend with wide-ranging and novel theories of harm.

As our US team reports, recent litigation in Goldstein v. Denner provides a useful reminder of the importance of getting the basics rights too, and appropriately documenting board meetings and other board-level communications, especially if a potential sale of the company is anticipated.

We round up this quarterly update with a review of the impact of ESG on M&A. Clearly, buyers of any kind of business need to avoid toxic operations undermining ESG policies and ambitions. Our briefing outlines how ESG considerations are broadening the scope of due diligence exercises and explains ways in which we are seeing ESG risk being addressed in transaction documents.